Ethanol is Sparking an Agribubble

The law of unintended consequences can be a bitch. When you meddle with the natural order of things, imbalances inevitably occur. Regulators (because that’s what they do) observe the imbalances and add more meddling regulations in an attempt to counteract them — creating yet further imbalances. The end result is what you have today: an economy in which growing corn to create fuel to power our automobiles actually seems to make sense.

But that economy is not a reflection of the ecosystems to which it is very closely tied, nor is it tied to the priorities that we, as societies, must maintain. We have always paid more to fuel our vehicles than we have to fuel our bodies, but this quixotic miscarriage of effort was not particularly problematic so long as our food and our fossil fuels came from different places. Rice paddies to not typically compete with oilfields.

I think that most of us intuitively agree with the fact that food sustenance is a much more important priority than transport. And while the two are interdependent, corn subsidies have knocked the whole dependency chain deeply out of alignment. The thesis I attempt to draw your attention to here is that without those subsidies, at least for the time being, the whole notion of “growing energy” in fields would be akin to mania. And without them, at least in the interim, the whole notion of our food supply competing for arable land with our fuel supply would be a non-issue.

Agflation is here. The cost of raw materials such as grains, rice, and especially corn is rising across the board. This means the cost of your daily meals will soon be rising as well, and the culprit is likely you — or at least it’s the twats you voted for. It’s not a good sign for a foundering U.S. economy, either, as “official” inflation reports tend to track just those sorts of items when measuring prosperity and struggle in inflationary markets.

Our planet, thanks to global warming and a mixture of other predicaments such as population growth and rampant warfare, barely has the resources to feed us all through agriculture, much less power our vehicles, industry, and cities. And while economic systems are supposed to be causing our allocation of resources etc. to fall into a natural balance, in this case there is substantial governmental interference which is creating an artificial economy around corn. Furthermore, many experts say that our past century, even when taking the extended drought of the 1930s into account, was unusually ideal for agriculture, and these days we ain’t doing so well. As the chart below illustrates, drought is the rule, rather than the exception to it, on the Great Plains.

There’s a perfect storm here which is diverting resources from your lunch plate to your gas tank. The basis for this imbalance are the subsidies for corn farmers in Canada and the U.S., as I’ve pointed out before. Corn is evil. And we wouldn’t grow as much of it as we do in North America, if it weren’t for the fact that it’s so heavily subsidized. The numbers for the U.S. alone are staggering.

No wonder farmers have been turning over rice and wheat and sugar crops to grow corn. With subsidies, they’re able to sell the corn on the market at prices substantially lower than it costs to produce. Of course, that’s especially fun if you’re a Mexican Farmer trying to grow maize as your family has done for hundreds of years, and there happen to be no subsidies in your own country. This has happened to Canada, mostly because of NAFTA and its proximity to the U.S. But it’s tempting, in the face of stiff competition from subsidized American farmers, for regulators around the world to attempt the same meddlesome subsidies in order to sustain their industries.

The second driver in the emergence of Ethanol also owes itself to interference by politicians and lobbyists: it can be traced back to a key loophole in the supposedly stringent fuel economy requirements placed on automobile manufacturers, called CAFE. As Timothy Carney points out:

“In 1975, following the Arab oil embargo, Congress created CAFE standards to force automakers and car buyers toward more fuel-efficient cars. An automakerÃ¢â‚¬â„¢s ‘CAFE’ is the average miles per gallon of its entire fleet (weighted by number of sales per model) for a given year. … Current law requires all automakers to have a CAFE of 27.5 mpg for cars and 22.2 mpg for light trucks.”

Sounds great, right? Only problem is that auto manufacturers need only pay fines in order to escape the strangulation that CAFE restrictions would otherwise place on their big SUVs. The U.S. government has collected about $500 Million from the manufacturers.

The loophole is more recent, and it’s driving ethanol into the mainstream, which doesn’t bode well for those of us who like our corn-on-the-cob, not in our tank. In 1988, the US congress enacted the “Alternative Motor Fuels Act, creating an exemption from CAFE standards for auto manufacturers interested in developing what we now call “Flex-Fuel” vehicles, which run on E-85, a mixture of 85% ethanol (derived from corn) and 15% gasoline. It’s also why most of these Flex Fuel vehicles are big gas guzzlers, like GM’s Silverado and Suburban (listed here). Thanks to the AMFA, those bad boys are now exempt from the dreaded CAFE, saving millions of dollars in annual fines. This is of course regardless of whether you choose to use E-85 at the pump or not. As Carney adds,

“the federal government would multiply ethanolÃ¢â‚¬â„¢s mileage by 6.6 and assume all flex-fuel cars would use ethanol half the time. This means a car that gets 20 mpg on gasoline and 15 mpg on ethanol would be treated for CAFE purposes as if it got 60 mpg.”

Typically, true alternative motor fuels such as Hydrogen, Electricity or Flux Capacitor were not invited to the AMFA party. It was strictly focused on E85. And now, with higher CAFE standards in the works, the U.S. Congress is poised to drive even more car models to the road using E85.

The result of this will be an even deeper investment in Ethanol, and further diversion away from the production of actual food on our farms. Surprisingly, even usually intelligent folks like Vinod Khosla and Tom Daschle have jumped on the Ethanol Bandwagon. Khosla has bet big on Ethanol, and the two waged a propaganda war, penning an OpEd piece in the NY Times called “Miles Per Cob” and speaking on radio shows like the one below:

The reality is far from the rosy picture they paint of America growing its own gasoline in perpetuity. It takes precious energy to produce Ethanol from crops, and of course since the cost of the raw materials is artificially deflated, there is little to advise the value of E85 once the true costs of the fuel are accounted for. And the emphasis on E85 as any sort of saviour is actually diminishing efforts to develop sustainable alternative fuel strategies, as it substantially displaces their economic benefits.

An unexpected benefit of all of this diversion of corn into the fuels market might be a return by our candymakers and soft drink manufacturers to real sugar, as maize prices skyrocket. The omnipresence of High-Fructose Corn Syrup, as I have asserted, is probably a major contributor to the North American obesity epidemic.

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It wasn’t until reading books like Guns Germs and Steel, Collapse, A Short History of Progress and the likes that I’d thought too heavily about the politics of our food supply. This article from Harpers is another sobering look at the relationship between food and energy. He loses me with the ending, but up until that point it’s a pretty good read.